Fed’s Policies Slam Us Again

by Wolf Richter • Aug 18, 2011 • Comments Off on Fed’s Policies Slam Us Again

The Federal Reserve, through its policy-setting Federal Open Market Committee (FOMC), has an often stated and much publicized policy of creating inflation in goods and services while controlling increases in wages. And it continues to have an excellent track record.

Earlier today, the Bureau of Labor Statistics (BLS) released the July CPI numbers, and they’re red hot: up 0.5% for the month, confirming the recent pace of our annual inflation rate of 5% – 6%. Since July 2010, CPI has risen 3.6%.

The BLS also released the real earnings numbers, which continued their long decline, falling 0.1% in July, and falling 1.7% since July 2010.

In addition, through FOMC rate decisions and through printing trillions of dollars, the Fed has forced down interest rates (yields) to near zero for bank deposits. Even five-year CDs and treasuries are yielding at or below 1%., guaranteeing a persistent loss to anyone who owns them. The sucking power of negative real yields. And a lot of people own them either directly or indirectly (even our Social Security trust fund is chock full of them, and just allowing interest rates to drift above the rate of inflation would bail it out). You have to venture into junk bonds to get a yield above our current annual inflation of 5% – 6%, but with a significant risk of default and total loss. And in the stock market, our favorite Ponzi scheme, well, you can lose 6% in a single day.

These factors—inflation, declining real earnings, and negative real yields—contribute in their insidious manner day in and day out to the destruction of the wealth and purchasing power of 95% of our society (how this should pull us out of our economic debacle is mathematically unclear to me).

In the process, the Fed has destroyed any notion of free credit markets. It (and other central banks) own them and run them. Yields are no longer a function of economic conditions, risks, inflation, and market reactions, but are based on the dictum of a few.

And who are these few? Well, let’s remember what the “Fed” is: A group of twelve Federal Reserve Banks that are owned and controlled by the largest financial institutions (or industrial companies with financial institutions, like GE) in their districts. The Fed is also the primary regulator of the very banks that own it. Congress set it up that way with the Federal Reserve Act of 1913.

And then let’s remember the infamous words of Spencer Bacchus (R-AL), Chairman of the House Banking Oversight Committee: “Washington and the regulators are there to serve the banks.”

Which brings us to the conclusion. Inflation, declining real earnings, and negative real yields—along with the Fed’s multi-trillion dollar handouts to the banks that own it—are by far the largest wealth transfer in the history of mankind. From the future and the many to the few.

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